Fixed Trusts
A fixed trust is one where the interests and rights of the beneficiaries have been fixed in accordance with the terms of the trust deed. For example, a named beneficiary will have a currently entitlement to the net income of the trust fund (usually referred to as the life tenant) and on their death, named beneficiaries will share the capital of the fund equally (usually referred to as the remainderman as they receive what remains on the death of the life tenant).

The rights of the life tenant (over the income) and the remainderman (over the funds which remain after the death of the life tenant) may be enforced against the trustees.

Other terms are often used to describe this type of trust and include strict trust, interest in possession trust and life interest trust.

Discretionary Trusts
This is the most common and widely used type of trust in offshore centres.

A discretionary trust is one in which none of the beneficiaries have an absolute current right to receive funds and instead, it is left to the trustees to decide who is to benefit, when they are to benefit and by how much they are to benefit. The trustees therefore, have discretion concerning the trust property and also in respect of other administrative issues.

It is the flexibility which discretionary trusts offer, compared to the features of a fixed trust, which makes this type of trust so popular.

In view of the fact that the persons who can receive funds from a discretionary can only receive a benefit if the trustees exercise discretion in their favour, it is usual to refer to them as 'discretionary objects'.

Protective Trusts
This is a type of trust and would usually be created to protect an improvident beneficiary from himself. The settler would have decided that the beneficiary concerned would not be able to handle the financial responsibilities associated with receiving capital from the trust (perhaps because he is a spendthrift or fond of gambling). The beneficiary would be given a life interest in the trust property (thereby becoming the life tenant) and therefore be entitled to the income as it arises.

In the event of him attempting to sell, assign or give away his life interest in the trust (usually signs that he is trying to enlarge his interest to receive a capital sum in exchange for his income entitlement), the beneficiary's interest in the income would cease and the property would instead be held on a discretionary trust under which the beneficiary, usually along with others, would have a discretionary interest.

Accumulation and Maintenance Settlements
This is a type of discretionary trust and creates certain tax planning opportunities, especially for clients in the UK.

Under UK tax legislation, certain conditions have to be met if an accumulation and maintenance trust is to receive favourable tax treatment. These can be summarised as follows:

i) The trust must be for the benefit of children (who would usually be the grandchildren of the settlor);

ii) The children must be entitled to receive trust property (usually the right to income) upon reaching a certain specified age, which must not be greater than 25;

iii) During the period prior to the children reaching the specified age, income can either be applied for their maintenance or accumulated.

Often the trustees will divide the trust property into separate funds for each of the children and they will be deemed to have a share of the capital on the happening of the event which gives them an absolute right to the capital. Any income which is to be accumulated will also be divided between the children and added to an accumulations fund which the trustees will probably set up for each child.

When a child attains the age at which he receives the income as of right, his accumulations fund is usually frozen and no further sums are added to it. This is because the share of income for that particular child will be due to him as it arises and the income can no longer be accumulated.

On the happening of the event which means the child can receive capital as of right, he will be paid his share of the capital held in the trust fund, plus the accumulated income held in his accumulated income fund.

In most accumulation and maintenance trusts the trustees will also have the power to make capital advances or appointments of capital to the children.

Charitable Trusts
These are discretionary trusts which are created to benefit charitable organisations. They are usually free from tax, are not subject to the trust perpetuity rules which apply to the other types of trusts and are not required to meet the certainty of objects because of the Cy-pres doctrine. Under the Cy-pres rules, a charitable trust will not fail even if it is unclear which charity is to benefit. Instead the settlor's general charitable intentions will be considered and the trustees can apply the trust property to the charity or charities which most closely meet the original intentions of the settlor.

A trust will usually be recognised as being charitable if the purposes of the trusts are:

a) For the relief of poverty;
b) For the advancement of education;
c) For the advancement of religion
d) For any other purpose which is beneficial to the community

None-charitable Purpose Trusts
Until recently, the only form of purpose trust which was permitted was the charitable trust. However, a number of offshore centres, such as Bermuda, the BVI, the Cook Islands, Cyprus and the Isle of Man, have introduced legislation which allows for the creation of non-charitable purpose trusts.

These are discretionary trusts but they are not created for the benefit of persons or charities (in other words, there are no beneficiaries) but instead for a particular purpose. This purpose must be specific (clearly stated in the terms of the trust deed), reasonable and possible. In addition, the purpose must not be unlawful, immoral or contrary to public policy.

A trustee (who would usually be required to be of appropriate standing such as a trust corporation, a lawyer or an accountant) would be appointed.

There would also be an enforcer appointed under the terms of the trust deed whose role would be to enforce the terms of the trust against the trustees (if necessary) and also to oversee the actions of the trustee. The powers of the enforcer would be similar to those of a protector but his fiduciary responsibilities would be governed by the statute which allows purpose trusts. There must be an enforcer in this type of trust and the trust deed should refer to the method of appointment. As a last resort the power to appoint an enforcer would pass to the court.

The duration of a purpose trust would usually have to comply with the perpetuity rules of the local centre although in the BVI such a trust can continue indefinitely. There will usually be a provision in the trust deed to cover how the trust will terminate and also what will happen to the balance of the trust property on termination.

Purpose trusts can be used for a variety of reasons and the following is a summary of the most common ones:

To hold a particular asset
A purpose trust could be created with the sole purpose of holding the shares in a private limited company (perhaps the voting shares) which in turn holds a particular asset. Alternatively, the trust could own the asset directly and not through an underlying company.

To assist in corporate financing schemes
A purpose trust could be used to own a company which is to transact a particular contract, such as the building of a ship or the leasing of an aircraft. A parent company would create the trust and the trustees could borrow funds secured against the assets of the underlying company. This structure could provide protection for both the bank (which lent the funds) and also the parent company. This is because the ownership of the assets could not change (because of the ownership by the trustees) and the trust would also offer protection against creditors of the parent who may come along in the future.

Asset protection
Group risks could be isolated by using a purpose trust. For example, the ownership of shares in a company involved in a high risk industry (such as oil exploration) could be placed in a purpose trust and the possible risks could then be removed and separated from the other assets which the parent organisation owns.

Creditor Protection Trusts
This type of trust is perhaps more commonly known as an asset protection trust and has been more popular in recent years, particularly with clients from the USA, especially those in the medical profession.

If a person creates a trust in an onshore centre there is a possibility that it might be set aside if a creditor comes along in the future, makes a successful claim against the settlor and the settlor does not have sufficient assets outside of the trust to meet the claim. In this situation the trust would probably be set aside and the creditor paid out of the property which was previously held in the trust.

Similarly, a settlor might be declared bankrupt a few years after creating the trust and once again the trust could be set aside.

A creditor protection trust is a device which is designed to protect a settlor's assets from future claims by creditors and from claims which may arise on future bankruptcy. Such trusts are offered by a number of offshore centres, most notably the Cayman Islands, the Bahamas, the Cook Islands and Gibraltar, and the protection is provided by specific legislation which such centres have in place which protect local trusts (and the property which those trusts hold) from attacks by future creditors. Basically, the burden of proof is on the claimant and the courts in those centres are generally loathe to make a judgement against trustees. This, together with the cost involved in pursuing a claim against a settlor in an offshore jurisdiction, often leads to the creditor deciding to drop his claim before the matter proceeds to court.

Forced Heirship Protection Trusts
In Civil Law countries, such as South America, Central and Southern Europe and the Middle East, local laws are in place, which require persons from those countries to leave a certain percentage of their assets on their death to certain heirs, usually their spouse and children.

This restriction on testamentary freedom can create problems for clients from those areas, but is has also created opportunities for some offshore centres who have introduced legislation which encourages clients from those countries to create local trusts which would be protected from claims by forced heirs. Basically, under the laws of such centres as the Cayman Islands, the Bahamas, Bermuda, Gibraltar and the Isle of Man, the capacity of the settlor and the legality of the trust will be governed by the laws of the offshore centre and the rights of heirs and forced heirship laws will be ignored by the local courts.

The ideal type of trust for this vehicle would also be discretionary.

Hybrid Trusts
This is essentially a cross between a discretionary trust and a fixed trust. The trustees will have power to appoint capital at their discretion, similar to a traditional discretionary trust, but in default of appointment, income is to be paid to a named individual (just as a life tenant is entitled to income in a fixed trust).

Trading Trusts
Although not widely used, some practitioners have used trusts as trading entities. Structures will vary but generally the trustee would be a company with limited liability which is empowered to conduct trading activities. The employees of the trustee company would then manage the business and all invoices and correspondence would be issued from, and addressed to, the trustee company.

Revocable Trusts
Generally, revocable trusts are not advisable. Under this type of arrangement the settlor would usually retain a number of powers and rights which one would usually expect to pass to the trustees (such as the power to authorise the payment of capital, the power to appoint trustees and the power to terminate the trust). In addition, the trust would usually terminate on the death of the settlor and the funds would be distributed in accordance with the terms of the will.

Grantor Trusts
This is a term which will be familiar to those who have had dealings with clients or advisers from the USA.

A grantor is the name given to the person who creates a trust (known as the settlor in most other countries) and a grantor trust is the term which is commonly applied to a trust under which the grantor is treated as the owner of the trust property under US tax law.

At the time of writing, there is considerable debate concerning the taxation treatment and reporting requirements of foreign trusts in the USA following the amendments made by the Small Business Job Protection Act (1996) to the US Federal tax rules.

The previous treatment of 'grantor' trusts in the USA
Under US Federal tax law, grantor trusts were disregarded for tax purposes on the basis that the grantor was treated as the owner of the assets (usually because he had power to revoke the trust or had a life interest) and taxed accordingly.

Where a non US person was the grantor, distributions to US beneficiaries were also outside the scope of Federal tax.

Changes Introduced
The Small Business Job Protection Act (1996) effectively limits grantor trust treatment and the benefits will generally no longer apply to those trusts which were, or are, created by non-US grantors (often referred to as 'foreign non-grantor trusts').

The main changes which came about under the 1996 Act are as follows:

a) Distributions to a US person from an offshore trust created by a non-US person will generally be taxed as income in the hands of the US beneficiary.

b) Loans received by US beneficiaries of an offshore trust could be treated as a distribution and taxed as income.

c) Distributions to a US person from an accumulated income fund could be subject to an interest charge.

d) US grantors of an offshore trust must notify the IRS and provide information relating to the trust.

e) US beneficiaries who receive a distribution from an offshore trust must provide details to the IRS.

f) Failure to provide information in d) and e) above could result in penalties being imposed.

g) If an offshore trust was created by a US grantor or there are US persons who may benefit from an offshore trust, the trustees are required to submit details to the IRS. Failure to report could lead to the grantor being penalised.

h) In addition to having to make a report in g) above, the trustees should also appoint a US Agent who the IRS can contact for additional information if required.